Epic One Real Estate focuses on increasing our clients Net Worth. We understand that the key to a successful real estate transaction is maximizing our client's Net Proceeds from each transaction, enabling our client's to have greater purchasing power.
Epic One Real Estate has guided our clients through many successful 1031 Property Exchanges and we have a network of experts ready to set you up for an exchange under IRS guidelines. What does this mean for you? You can avoid thousands of dollars in Capital Gains Tax and net more per transaction.
by Ari Schauder, Broker
The IRS rules for conducting an IRC 1031 Exchange is exact with several timeline deadlines. Epic One Real Estate utilizes a proven team of experts to arrange properly executed IRC 1031 exchanges. Our managing broker directs, coordinates, and tracks progress of key date deadlines and milestones of all professional service providers during exchanges, including lenders, loan brokers, accomodators, escrow officers, and all other professionals critically involved in each exchange transaction.
In a 1031 Exchange an investor sells his property, called “Relinquished Property,” to acquire a “Replacement Property” without attracting tax on capital gains.
While the entire exchange process is overseen by Epic One Real Estate, the IRS mandates that the actual "exchange" of property is conducted by "Qualified Intermediary (QI)". The "Qualified Intermediary (QI)", an exchange accomodator is a middle-man who provides services of holding title to property during the exchange, prepares exchange paperwork/contracts for the actual exchange, oversight, escrow and expertise to ensure that the transaction conforms to Rules under Section 1031 of the Internal Revenue Code.
Now, let us see what all properties qualify for 1031 Exchange. Real estate in general, for income tax purposes, has been divided into four categories- business use, investment, personal use and outright sale. Of them, the last two are unfit for 1031 Exchange.
Then comes the foremost stipulation: the new investment must be in a like-kind property. But this is not a blanket barrier either. It does not restrict that the exchanged properties must be like the photocopy of the other property in all respects, as in a bare land for bare land situation. It can be any real property held for investment or trade or business that can qualify for this exchange with a similar kind of real property used in trade or business.
For example, one can exchange a rental house for an apartment building, investment land for a rental house, an office building for a shopping center, an office building for several rental houses, etc.
After the sale of the first property or relinquished property, the investor must identify the replacement property within 45 days from the date of transfer of the relinquished property. This period is called “Identification Period” and the whole exchange must be over within 180 days from the date of transfer of the relinquished property, known as the Exchange Period.
A maximum of three properties can be identified for possible exchange. The binding Rule is that their aggregate fair market value (FMV) at the end of the identification period should not exceed 200 percent of the aggregate fair market value of all relinquished properties on the date of transfer of the relinquished properties.
There are exceptions too. In some cases, if a replacement property is received before the end of the identification period, that too will be treated as properly identified even if the three-property Rule and 200% Rule are being violated.
In that case, the fair market value of that replacement property must be at least 95% of the aggregate fair market value of all the identified replacement properties. This is known as the “95 percent Rule.”,
In the exchange, it is compulsory that the investor has to reinvest all the proceeds from the sale of the relinquished property. If the exchanger fails to do so, the balance “cash boot” becomes taxable as capital gain.
The investor must always acquire the replacement property with equal or greater debt. If the exchanger does not acquire a replacement property with equal or greater amount of debt, the IRS deems it as reduction in debt and a benefit accruing to the exchanger, hence taxable, unless it is offset by adding equivalent cash to the replacement property purchase.
So it turns out that it is key for the entire exchange team, including your professional tax advisor, the qualified intermediary, escrow officer, loan officers, and your Realtor to be completley coordinated in all respects to ensure that all proceeds of the sale of first property is reinvested, all timeline deadlines are met, and all Rules are strictly followed and equity is preserved. Having the best team of professional all coordinated by Epic One Real Estate is the key to a successful 1031 exchange.
IPX 1031 Exchange, is a qualified intermediary, and is set up to assist you in making a smooth and easy exchange.
IRS Rules for Exchanges...
You will need to follow six primary
rules for your exchange to meet
stringent IRS regulations:
Six things you need to know...
are literally thousands
of rules you would need to know to successfully
complete a §1031 exchange without
violating an IRS statute. But 97% of
all those straight exchanges are basically
covered by only Six of those things!
Review the basic 6 rules and consult with your experienced tax advisor to see if you are eligible to defer
your taxable gain under IRC section
Property Use. Both your
old and new properties must qualify
as investment or business use.
If both properties pass this test,
you can exchange nearly any type
of real estate.
Day Identification Period.
You have 45 days from the closing
of your sale to list the properties
you may want to buy. There are
no exceptions to the deadline.
Day Exchange Period.
From the sale closing date, you
have 180 days to close on the
purchase of one or more properties
from the 45-day list. Again, there
are no exceptions to this deadline.
The IRS mandates that you
use a QI to prepare the
legal documents for your
exchange. Because the QI
must be independent, it
cannot be your friend, employee,
broker, or even your accountant
or attorney. The QI also
holds your money, so that
you do not have access to
title holding. You
must purchase and take title
to your new property exactly
as you held title to your
defer all of your capital
gain tax, you must buy a
property equal or higher
in value than the one you
sold. Also, you must reinvest
all of the cash proceeds
from your sale.
The investor must always acquire the replacement property with equal or greater debt. If the exchanger does not acquire a replacement property with equal or greater amount of debt, the IRS deems it as reduction in debt and a benefit accruing to the exchanger, hence taxable.
The exception to this rule is that any decrease in debt of the replacement property(ies) be offset by adding equivalent cash to the replacement property purchase.
A reverse exchange is a way to purchase your replacement property prior to completing the sale of your relinquished property. This type of exchange is more costly and more complicated than a standard delayed exchange. The reverse exchange is the perfect vehicle to use, however, if you have located the purchase property and can’t wait for the other property to sell.
There are two types of reverse exchanges:
Exchange First – In this scenario, the accommodator "purchases" the property from you so that you can exchange into your desired property. In order to complete this type of exchange, you need to have the funds available for the accommodator to use to buy the property from you. You then have the same 180-day time frame to complete the purchase of your replacement property.
Exchange Last – In this scenario, the accommodator "purchases" your replacement property from the seller and holds it until you sell your relinquished property. You must provide the accommodator funding to purchase the property from the seller. A recent IRS Revenue Procedure set up "safe-harbor" guidelines for this type of exchange. You now have 45 days to identify the property you plan to sell and 180 days to sell the property and purchase the replacement property held by the accommodator. Exchanges set up outside the "safe-harbor" guidelines are possible but may not be as safe. The "exchange last" scenario is often used by individuals who plan to improve a piece of raw land prior to exchanging into the property.
Click on IPX 1031 ExchangesTo Learn More About 1031 Exchanges.